US Bank 2011 Annual Report Download - page 36

Borrowings The Company utilizes both short-term and long-
term borrowings as part of its asset/liability management and
funding strategies. Short-term borrowings, which include
federal funds purchased, commercial paper, repurchase
agreements, borrowings secured by high-grade assets and
other short-term borrowings, were $30.5 billion at
December 31, 2011, compared with $32.6 billion at
December 31, 2010. The $2.1 billion (6.4 percent) decrease in
short-term borrowings reflected reduced borrowing needs by
the Company as a result of increases in deposits.
Long-term debt was $32.0 billion at December 31, 2011,
compared with $31.5 billion at December 31, 2010, reflecting
$2.3 billion of medium-term note issuances and a $1.4 billion
increase in long-term debt related to certain consolidated
VIEs, partially offset by $1.6 billion of subordinated debt
repayments and maturities, $.8 billion of extinguishments of
junior subordinated debentures, and a $.4 billion decrease in
Federal Home Loan Bank advances. Refer to Note 13 of the
Notes to Consolidated Financial Statements for additional
information regarding long-term debt and the “Liquidity Risk
Management” section for discussion of liquidity management
of the Company.
Corporate Risk Profile
Overview Managing risks is an essential part of successfully
operating a financial services company. The most prominent
risk exposures are credit, residual value, operational, interest
rate, market and liquidity risk. Credit risk is the risk of not
collecting the interest and/or the principal balance of a loan,
investment or derivative contract when it is due. Residual
value risk is the potential reduction in the end-of-term value
of leased assets. Operational risk includes risks related to
fraud, legal and compliance, processing errors, technology,
breaches of internal controls and in data security, and
business continuation and disaster recovery. Interest rate risk
is the potential reduction of net interest income as a result of
changes in interest rates, which can affect the re-pricing of
assets and liabilities differently. Market risk arises from
fluctuations in interest rates, foreign exchange rates, and
security prices that may result in changes in the values of
financial instruments, such as trading and available-for-sale
securities, certain mortgage loans held for sale, MSRs and
derivatives that are accounted for on a fair value basis.
Liquidity risk is the possible inability to fund obligations to
depositors, investors or borrowers. Further, corporate
strategic decisions, as well as the risks described above, could
give rise to reputation risk. Reputation risk is the risk that
negative publicity or press, whether true or not, could result in
costly litigation or cause a decline in the Company’s stock
value, customer base, funding sources or revenue. In addition
to the risks identified above, other risk factors exist that may
impact the Company. Refer to “Risk Factors” beginning on
page 134, for a detailed discussion of these factors.
Credit Risk Management The Company’s strategy for credit
risk management includes well-defined, centralized credit
policies, uniform underwriting criteria, and ongoing risk
monitoring and review processes for all commercial and
consumer credit exposures. The strategy also emphasizes
diversification on a geographic, industry and customer level,
regular credit examinations and management reviews of loans
exhibiting deterioration of credit quality.
In addition, credit quality ratings as defined by the
Company, are an important part of the Company’s overall
credit risk management and evaluation of its allowance for
credit losses. Loans with a pass rating represent those not
classified on the Company’s rating scale for problem credits,
as minimal risk has been identified. Loans with a special
mention or classified rating, including all of the Company’s
loans that are 90 days or more past due and still accruing,
nonaccrual loans, and those considered troubled debt
restructurings (“TDRs”), encompass all loans held by the
Company that it considers to have a potential or well-defined
weakness that may put full collection of contractual cash
flows at risk. The Company’s internal credit quality ratings
for consumer loans are primarily based on delinquency and
nonperforming status, except for a limited population of
larger loans within those portfolios that are individually
evaluated. For this limited population, the determination of
the internal credit quality rating may also consider collateral
value and customer cash flows. The Company recently began
obtaining recent collateral value estimates for the majority of
its residential mortgage and home equity and second mortgage
portfolios, which allows the Company to compute estimated
loan-to-value (“LTV”) ratios reflecting current market
conditions. These individual refreshed loan-to-value ratios are
considered in the determination of the appropriate allowance
for credit losses. The Company strives to identify potential
problem loans early, record any necessary charge-offs
promptly and maintain appropriate allowance levels for
probable incurred loan losses. Refer to Notes 1 and 6 in the
Notes to Consolidated Financial Statements for further
information of the Company’s loan portfolios including
internal credit quality ratings.
The Company categorizes its loan portfolio into three
segments, which is the level at which it develops and
documents a systematic methodology to determine the
allowance for credit losses. The Company’s three loan
portfolio segments are commercial lending, consumer lending
and covered loans. The commercial lending segment includes
loans and leases made to small business, middle market, large
corporate, commercial real estate, financial institution, and
public sector customers. Key risk characteristics relevant to
commercial lending segment loans include the industry and
geography of the borrower’s business, purpose of the loan,
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